What are Some of the Supporting Arguments on the Contribution Margin Analysis?
The use of the contribution margin simplifies the calculation of the net income. In a new business endeavor, the owner can easily compute the break-even point, income & sales projections, and other information for decision making. As the owner of a new business, he needs rough estimates for his financial projections. If he has the information, it will be easy for him to decide whether to add or discontinue some products, how to price certain products or services, or do some critical decisions like structuring the sales commissions or bonuses for his sales force. In the production of multiple products, as long as the contribution margin of a certain product is positive, it is still possible to continue the production of the said product even if it obtains an accounting loss. Contribution margin provides the information on operating leverage. Operating leverage is the measurement of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how ris
